Uh-oh: I read something today that all but pushed me into the Bullish camp, nearly cancelled my recession forecast, and almost made me revise my market prediction to Dow 16,000: Former Federal Reserve Chair Alan Greenspan
warned that the U.S. economy might slip into recession by
the end of the year.

While we can disagree as to how good a Fed Chair Easy Al was — he had a number of notable successes, i.e., LTCM and post Asian Contagion — IMO he was too much like a bartender whose answer to nearly any problem was to pour another one.

However, there is little disagreement that economic forecasting was not his forté. We have noted in the past numerous examples of his lack of forecasting acumen.

That said, here is his economic commentary from this morn:

"Mr. Greenspan said the U.S. economy has been expanding
since 2001 and that there are signs the current economic cycle is
coming to an end. "When you get this far away from a recession,
invariably forces build up for the next recession, and indeed we are
beginning to see that sign, for example in the U.S., profit margins …
have begun to stabilize, which is an early sign we are in the later
stages of a cycle," he said. "While, yes, it is possible we can get a
recession in the latter months of 2007, most forecasters are not making
that judgment and indeed are projecting forward into 2008 … with some
slowdown."

Mr. Greenspan said that while it would be "very
precarious" to try to forecast that far into the future, he couldn’t
rule out the possibility of a recession late this year. He said he has
seen no economic spillover effects from the slowdown in the U.S.
housing market, and added that the global economy seems "benign and
stable."

"We are now well into the contraction period and so
far we have not had any major, significant spillover effects on the
American economy from the contraction in housing," Mr. Greenspan said.

U.S. housing starts are down "quite sharply," he said,
which is "implicitly creating a reduction in the very high inventories
of new unsold homes."

Its enough to make you want to buy SPX futures . . .

>

UPDATE: March 4, 2007, 9:42am

In today’s NYT, Dan Gross has a column about the forecasting record of the Maestro and other dismal scientists:

"Indeed. No disrespect to Mr. Greenspan, but neither he nor the similarly numerate members of his professional fraternity have a particularly good record of forecasting recessions. As Yoram K. Bauman, an economist who teaches at the University of Washington and performs stand-up comedy, summed up an often-used line: “Macroeconomists have successfully predicted nine of the last five recessions.”

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Patu — that’s the key … the liquidity. While nominal short-term interest rates have been flat for months, money supply has been exploding the world over, as has risk-taking. The result is the explosion in virtually EVERY asset under the sun (commercial real estate, stocks, high-risk bonds, etc.) … and an explosion in things like leveraged buyouts (witness the $45 billion TXU takeout announced today).

so on one hand we have the statement above telling us we’re headed for recession yet a few days ago he was telling us that the yield curve was marginalized and had no longer the ability to forecast a recession.

Which is it Uncle Al?

Maybe we should put those two statements in a room together and let them beat each other up.

At least now, no matter what happens later in the year his handlers can look back, pick the statements that best fit, and say “SEE!” to us with perfect innocence. That is typical of some types of stock picking boiler-room newsletters that are harvesting suckers. I don’t expect it of the former fed chief.

This guy must be really getting scared that the government might come after him with an orange jump suit if things fall apart and the public actually does start to figure out what is going on in the FR banking system

We are drowning in excess liquidity everywhere.
Look at the DOW stock. One unverified rumor from a “reputable” UK tabloid Sunday Express (It is similar to National Enquirer in terms of credibility that also publishes articles like “UFO Cover-Up Goes On”) and the stock jumps 8% in the US.

Barry, isn’t all this kind of stuff too well known now. Everyone is seems is trying to be a contrarian, Magazine covers and all that crap. I do think Greenspan is highly overrated however by the masses so maybe your on to something but it seems to me the only way to be contrarian these days is to try not to be.

Former U.S. Federal Reserve Chairman Alan Greenspan warned Monday that the American economy might slip into recession by year’s end.

He said the U.S. economy has been expanding since 2001 and that there are signs the current economic cycle is coming to an end.

“When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign,” Greenspan said via satellite link to a business conference in Hong Kong. “For example in the U.S., profit margins … have begun to stabilize, which is an early sign we are in the later stages of a cycle.”

“While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown,” he said.

Greenspan said that while it would be “very precarious” to try to forecast that far into the future, he could not rule out the possibility of a recession late this year.

The U.S. economy grew at a surprisingly strong 3.5 percent rate in the fourth quarter of 2006, up from a 2 percent rate in the third quarter. A survey released Monday by the National Association for Business Economics showed that experts predict economic growth of 2.7 percent this year, the slowest rate since a 1.6 percent rise in 2002.

Greenspan also warned that the U.S. budget deficit, which for 2006 fell to $247.7 billion, the lowest in four years, remains a concern.

“The American budget deficit is clearly a very significant concern for all of us that are trying to evaluate both the American economy’s immediate future and that of the rest of the world,” he said via satellite at the VeryGC Global Business Insights 2007 Conference.

Greenspan also said he has seen no economic spillover effects from the slowdown in the U.S. housing market.

“We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing,” he said.

Alan Greenspan is by all means a smart fundamentalist, he just doesn’t understand sentiment. When he called said that the crash of 87 would have an effect on the economy it did – in 1991. When he claimed “irrational exuberance” in 1997 – it materialized in 2000. So now he calls a recession for late 2007.

However, we may be getting used to Big Al calling the shots too early, hence we will not be ready when they do come as planned. (We’ll leave the early calls for Roubini).

Thus it would seem that Alan realizes the state of the economy, as well as how resilient it acts, albeit in that state of trouble.

I suspect that either:

1. Big Al will look like another ill-claimed economic prognosticator and we won’t see a recession for maybe a good year.

2. We see a major fall in confidence – coming from a sharp housing correction, stock market crash/sharp decline – that will send the entire previous fiscal quarter into the red.

Greenspan just announced that we will finally get our recession later this year! Asia and Europe have reacted by pulling back and the US is already in recession, we are just waiting for the media to admit it. Although, if we do not get something we can…

Well, no. He didn’t really say that. But given his history as a serial bubble blower here — and his superlative track record as a forecastor — he might as well have said that anyway. But his comments were enough to tank the thinly traded, pre-holiday…

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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